Question

The manager of your company’s pension fund is compensated entirely based on fund performance; he earned over $1.2 million last year. As a result, the fund is contemplating a proposal to cap the compensation of fund managers at $250,000. Provide an argument against the proposal. You must give an explanation.

Answer 1

It can be seen in the given case that manager of pension fund is compensated based upon performance in the fund and the manager is able to earn based upon his compensation so compensation should not be capped because it will be demotivating these managers in order to make higher rate of returns so company should always be trying to motivate these managers in order to perform exceedingly well and maintain a higher rate of return in order to help the stakeholders and company should be compensating them according to their performance rather than capping on their compensation.

performance based compensation is always an incentive for the manager to perform beyond his limit and exceedingly well and he will be motivated to perform exceedingly well because he knows that his compensation is based upon his performance but when we are capping the compensation of the manager, it is sending a negative influence to these managers and they are not motivated to work exceedingly well because they know that even if they are working exceedingly well they are not going to be paid so their personal goals are not synchronised with the organisational goals and they will be demotivated and they will not be performing according to the standards they have set earlier, so I will be urging the management not to cut their compensation and cap their compensation because it will be leading to decrease in the performance of these managers as their personal goals are not synchronised with the organisational goals.